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As weather patterns become more unpredictable and extreme weather events become more frequent, the risks to asset values will mount. One estimate has put US$1 trillion of real estate at risk of coastal flooding in the U.S. alone.

Organizations which don’t implement climate mitigation and adaptation strategies face disruption, damages, higher maintenance and insurance costs, coupled with lower revenues:

• More frequent and severe climate events will increase maintenance costs and insurance premiums. Less resilient buildings will become harder to insure, see lower tenant demand and thus fall in value.
• Disruption to operations and property downtime will lead to reduced revenues and increased costs.
• Resources such as energy and water will become more expensive for companies which haven’t adopted measures to reduce consumption.
• Increased regulations around climate risk reporting, such as the SEC legislation in the U.S. and CSRD in Europe will impose compliance mandates for large businesses.

Investors without climate mitigation or adaptation strategies are experiencing reduced liquidity and pricing impacts on asset sales. While this is not a new trend, it is becoming more prevalent as the understanding of the impacts and implications of climate risk increases. For example, in the UK, a prime retail park situated within a flood zone was recently brought to market without a full flood risk assessment (FRA), leading to a reduction in interested parties and likely material impact on pricing.

‘With the current short-term political uncertainty, economic growth opportunities in some markets may now lie in the scientific certainty of climate change adaptation together with emissions reduction.’

- Sonny Masero, Managing Director, Global ESG | Hines

Around the world, cities will have to prepare and adapt to climate change in different ways.

Permeable pavements to reduce the risk of flooding, misting stations to help residents cope with more frequent and intense heat waves, buried power lines and reinforced foundations to mitigate storm damage are just some of the solutions that can make cities more resilient.

Climate resilience of a specific asset is determined as much by the resilience of its supporting infrastructure – transport, power, water and sanitation – as by the resilience of the asset itself. For this reason, investors will place a higher risk premium on properties in a city affected by climate events, regardless of whether individual properties are vulnerable.

Global studies find the benefits of investing in climate-resilient infrastructure outweigh the costs. Resilient infrastructure includes hard defenses, such as sea walls and flood barriers, as well as natural infrastructure, such as wetlands. Nature-based approaches are often cheaper.

Owners:

• Demand will shift in response to climate risk, so incorporate climate risk modelling into investment strategies. Avoid assets in places most exposed to climate hazards.
• Crucially, factor in city resilience strategies and the potential vulnerability of local transport infrastructure, power and water supplies to climate events. 
• Adopt a holistic approach: evaluate physical climate risk and resiliency planning alongside decarbonization and asset repositioning.
• Identify the most vulnerable assets and work on resilience measures. Keep abreast of change and review climate risks annually.
• Engage and collaborate with other stakeholders to create and implement integrated resilience strategies.

Occupiers:

• Identify those sites most vulnerable to climate hazards and infrastructure failure, then strategize. 
• Engage with landlords to establish contingency plans for extreme weather events and identify areas for longer-term collaboration. Ensure these are clearly outlined through green lease clauses.
• Develop and integrate resilience strategies to add long-term value with employee health and wellbeing needs, social impact and creating inclusive spaces.
• Communication and alignment between stakeholders at all levels, from suppliers to C-Suite, is imperative to climate mitigation and adaptation policies.

As the world grapples with the escalating consequences of climate change, the real estate industry finds itself standing at a precipice. In the coming years, the effects of climate change are set to deepen, presenting the industry with tangible and increasingly urgent material threats.

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